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Falling Cannabis Prices Weigh on Tilray's Sales Growth

By Dan Caplinger – Nov 13, 2018 at 6:39PM

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The marijuana company still sees a bright future.

Amid all the hype about marijuana stocks, the one great equalizer comes when companies have to report their financial results. Tilray (TLRY) has seen an amazing level of interest since its decision to list on the Nasdaq Stock Market earlier this year, and now, many investors are watching closely to see if the cannabis contender has the ability to live up to its full potential.

Coming into Tuesday's third-quarter financial report, Tilray investors were looking for solid sales growth even as red ink continues to flow. Tilray wasn't able to deliver quite the top-line rise that most had expected, and part of the blame might be the reduced prices that the company brought in from its cannabis sales. That's a trend that shareholders will want to keep an eye on even as the rollout of recreational cannabis in Canada boosts results in the fourth quarter.

Jar of dried cannabis with seeds and papers on a wood table.

Image source: Getty Images.

Tilray benefits from the boom in cannabis

Tilray's third-quarter results were just the latest example of marijuana companies delivering impressive-looking results. Revenue of $10.0 million was higher by 86% from the third quarter of 2017, although it was slightly less than the $10.2 million that most of those following the stock had expected to see. Losses of $18.7 million were also much worse than in the year-ago period, but after allowing for non-cash compensation expenses, adjusted net losses of $0.08 per share were better than the $0.12 per share loss that marked investors' consensus forecast.

Tilray's fundamental results showed a mixed performance. On one hand, Tilray did a good job of boosting its production and sales capacity, with total sales volume of 1,613 kilogram-equivalents sold marking a 136% rise from the 684 kilos that the company sold in the third quarter of 2017. The company attributed the gains to increased demand from patients using medical marijuana, as well as bulk sales to other licensed producers of cannabis products and Tilray's efforts to distribute its product on a wholesale basis for export.

However, pricing pressures had a negative impact on Tilray's overall sales numbers. The cannabis producer said that its average net selling price fell to $6.21 per gram, down sharply from the $7.53 per gram that it brought in during the year-earlier period. Tilray attributed the reduction to a change in its sales mix, which included more bulk sales than in the same period during 2017.

Tilray also held nothing back when it came to spending money to try to build market share. Sales and marketing expenses were up by nearly 150% from year-earlier levels, and overhead costs rose by about the same percentage. In addition, Tilray's stock-based compensation expenses jumped to $11.2 million, up from just $35,000 and showing the way that employees of the company are sharing in the stock's success. With Tilray in an all-out competitive effort to position itself well for Canada's recreational cannabis rollout, investors fully expected the company to take the opportunity to try to grab market share.

Can Tilray keep gaining ground?

CEO Brendan Kennedy tried to keep investors focused on the long run. "We are in the early stages of achieving our growth potential," Kennedy said, "and our team continues to strategically execute on disciplined operational initiatives and investments to support Tilray's long-term, sustainable growth as the pace of legalization continues to accelerate around the world." The CEO reiterated the company's commitment to serve both the medical and recreational cannabis markets both in Canada and globally.

With respect to the Canadian rollout, Tilray's comments were minimal. The company managed to secure cannabis supply agreements with eight Canadian provinces and territories, including the key areas of Ontario, Quebec, and British Columbia, along with Manitoba, Nova Scotia, Yukon, Northwest Territories, and Prince Edward Island.

Instead, Tilray seems more focused on global opportunities. The cannabis company highlighted its acquisition of Alef Biotechnology to allow exports to Chile, with the intent of distributing products around Latin America. Wins in Germany, the U.S., and Australia also showed the benefits of Tilray's attempts to become a worldwide player in the marijuana industry.

Tilray investors didn't see the results as being particularly inspiring, and the stock dropped between 1% and 2% in after-hours trading following the announcement. Those following the marijuana industry will have to watch closely to see how well Tilray does in capturing new cannabis users in Canada during the fourth quarter, but they'll also want to keep an eye on the company's bigger plans to create a global marijuana empire.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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